Introduction
    

Financial statement analyses refer to the assessment of an organization’s financial performance and stability. In this study, ratio analyses on the firms financial performance as well as stock analyses is employed. The study covers two organizations namely Delta Airlines (DAL) and American Airlines (AMR), both in the large airlines services industry, both started within 1920’s. Financial information used is retrieved from the organizations 2010 annual report while stock charts have been retrieved from yahoo finance historical prices. Both American Airlines and Delta Airlines operate in major airlines, service industry in the United States of America. The organizations are in competition with other major airlines in US including Ryan air Holding Ltd, China Southern Airlines Co. Ltd, and Easy jet Plc AND Singapore airlines among others.

Corporate History

American Airlines serves approximately 250 cities in over 40 countries. The organization has an average of 3,400 daily flights. To gain competitiveness, the organization has leveraged on its wide network as well as the high frequency of its flights. The history of the organization is traced back in 1920’s when Charles A. Lindberg engaged his friends in mail delivery using his plane at the Robertson Corporation, Missouri. He developed his company which merged with Robertson Company where he and worked as an employee to form the America Airlines in 1929. The organization started trading in New York Exchange market in 1939. The organization also engaged in real time data processing systems in collaboration with IBM in 1964. In 1974, the organization was led by Albert V. Casey at the capacity of chief financial officer as well as the chairman of the board. The organization expanded significantly towards the end of 20thn century. The organization had already adopted Boeing 777 and 727 in its operations by 2002.
The organization reached an agreement with Japan Airlines to jointly monitor their operations between North America and Asia. On January 2011, the two airlines announced commencement of their joint business in respect to transpacific operations. To enhance its global coverage, the organization expanded its code sharing significantly in 2011.On the other hand, the onset of Delta Airways started in 1924, when Huff Deland engaged in crop dusting using air planes. In 1927, it expanded operations from Macon to Peru and started offering passenger flights. By 1930, it had already expanded these services to Atlanta. In 1941, the organization moved its headquarters from Monroe to Atlanta. Over the years, the organization expanded its operations significantly through strengthening of ties with regional airlines. By 1987, it had attained the position of US largest carrier. In 2010, the organization reported a $ 2 billion investment through 2013 aimed at improving its customer service.
Ratio Analyses

                                     Financial analyses for 2010 accounting period    
                                     Current ratio

        
Company                     Formula                        Values used             Ratio
Delta airlines                 CA/CL                           7307/11385                0.641809398
American Airlines                                               6838/8780                 0.77881549
                                   Quick ratio                    (6838-594)/8780         0.711161731
Delta airlines                CA-inventory/CL              (7307-318)/11385        0.61387791

American Airlines            
                                   Receivable turn over        
Delta airlines                les/account Receivable    31755/1456             21.80975275
American Airlines                                              22170/738               30.04065041
                                  Days sales uncollected        
Delta airlines               Acc. Receivable/net
                                      sales*100                 1456/31755*100          4.585104708
American Airlines                                            (738/22170)*100         3.328822733

                                Inventory turn over        
Delta airlines             COGS/average inventory    29538/318                92.88679245
American Airlines                                             21986/594                37.01346801

                                   Days inventory on hand        
Delta airlines                365/inventory turn over        365/92.88679       3.929514627
American Airlines                                                 365/37.01             9.862199406
                                   Payables turn over        
Delta airlines                    sales/accounts payable  31755/1713          18.53765324
American Airlines                                                 22170/1156           19.17820069

                                   Days payable        
Delta airlines        365 days/payable turn over       65/18.53765          19.68965861
American Airlines                                               365/19.178            19.03222442
        
                                   Profit margin        
Delta airlines                profit/sales*100            (593/31755)*100          1.867422453
American Airlines                                           [(471)/22170]*100        -2.124492558
                                   Asset turn over.
Delta airlines                sales/total assets         31755/43188               0.735273687
American Airlines                                            22170/25088               0.883689413
        Return on assets        
Delta airlines                Profit/total assets *100  (593/43188)*100            1.373066593
American Airlines                                            [(471)/43188]*100        -1.877391582
                            Return on equity
                            
Delta airlines                net income/equity*100     (593/897)*100            66.10925307
American Airlines                                              [(471)/5308]*100        -8.873398644
        
                            Debt to equity ratio        
Delta airlines                Total debt/total equity    (11385+30906)/897        47.14715719
American Airlines                                               19780/5308                3.726450641
        
                            Interest coverage ratio        
Delta airlines    EBIT/ interest expense                2217/1004                2.208167331
American Airlines                                              308/823                    0.374
        
                            Free cash flow        
Delta airlines        Operating cash flow- capital exp.    2832-(1055+287)        1490
American Airlines                                                     1241-1962                -721
                            Cash flow yield        
Delta airlines        Cash flow per share/stock price     (1490/255)/12.6            0.464
American Airlines                                                    (-721/848)/7.79            -0.109
        
                            Price earnings ratio        
Delta airlines                stock price/EPS                12.6/0.70                  18
American Airlines                                                  7.79/1.141                6.827344435
Values used are in millions except earnings EPS, stock price, and cash flow yield.     
Free cash flow is the only ratio in millions       

Source: United States Security Exchanges Commission 2011.

Liquidity Analyses
    From the above presentation, it is clear that the two organizations have recorded varying level of performance in their 2010 financial year in respect to liquidity. It is clear that both organizations performed poorly in 2010 in respect to liquidity. A current ratio of 0.64 for Delta airlines and 0.78 fro American Airlines fell short of the recommended current ratio of 2. The quick ratios equally fell short of the recommended quick ratio of 1. This indicates the organization’s low capability to finance its current operations as well as meet their current obligations. In spite of this, it is clear that Delta Airlines is more liquid than American Airlines. Delta airlines recorded a lower receivable turn over at 21.81 as compared to American Airlines which recorded a receivable turn over of 30.04. This implies that American Airlines (AMR) is able to collect turn credit sales to cash at a faster rate than Delta Airways. This implies that it is in a better position in raising its working capital. Retrospectively, this is reaffirmed by the organization’s higher level of quick and current ratio. Whenever cash is tied up in receivables, the operations of an organization are hampered. This is because the airline companies needs cash to fuel their planes, pay for repairs and maintenance as well as pay their employees among others. This implies that without sufficient cash flows, an organization may be forced to result to borrowing which comes at a cost. Delta airways slow speed in collecting cash from receivables in reflected in its higher day’s sales uncollected of 5 days as compared to the four days taken by AMR to convert receivables into cash. These three ratios clearly indicate the lower liquidity levels recorded by Delta Airlines as compared to its competitor: American Airlines.
Efficiency Analyses
    Unlike in goods business, service industry presents differences that may affect application of ratios in financial analyses. For instance, inventory in a service business may be small or non existent. In 2010, DAL recorded an inventory turn over of 92.98 as compared to inventory turn over of 37.01 recorded by AMR. This indicates that AMR is able to turn its inventory to sales at a higher rate as opposed compared to AMR. This leads to increased level of revenue generated by the organization. This being the case, it is clear then that the low receivable rate recorded by Delta airlines is mainly as a result of increase in credit receivables.
    As a result of the high level of stock turn over recorded by DAL, it has led to lower number of days that inventory is held on hand at 4 days as compared to 10 days recorded by AMR. This implies that AMR would end up incurring higher level of inventory related costs as compared to DAL. The level of Payables turn over is a measure of how often an accounting entity meets its obligations to creditors. DAL recorded a payables turn over of 18.54 in 2010 as compared to a higher payables turn over of 19.18 recorded by AMR in the same year. This indicates that DAL is paying its suppliers and other creditors at a slower rate than AMR. This has the potential of leading to suppliers’ dissatisfaction which has the potential of leading to disruption of its operations, more strict terms of supply among other unfavorable outcomes. Nevertheless, the margin in payables turn over between the two organizations is relatively small leading to an average of 20 days taken by the two organizations in meeting their creditors’ obligations. From these five efficiency ratios discussed above it is clear that American Airways is fairing better in comparison to its competitor: Delta Airways.
Profitability Analyses
    One of the most used indicators by investors among other publics in assessing the financial performance of a firm. In spite of American Airlines higher liquidity and efficiency health as compared to its competitor Delta Airways, its profitability is lower. AMR reported a loss of $471 million in 2010 as compared to net income of $593 million recorded by Delta airlines over the same period. This indicates AMR low ability to generate return to its shareholders. In fact, it is generating negative returns, reducing investors’ wealth as compared Delta Airlines. This makes less attractive for investment to investors than its competing firm. Retrospectively, this can be explained by the two organizations inventory and receivable turn over discussed above. AMR has focused so much on operating efficiently as evidenced by its higher efficiency level to the detriment of effectiveness.  By risking high level of services to account receivables risks and collection risks, Delta airways has managed to grow its profits significantly. This is clear since AMR is still ranked higher in asset turnover. This is a measure of an organization’s ability to generate sales from available resources. AMR recorded a higher rate of asset turnover in 2010 at 0.88 as compared to 0.74 recorded by Delta Airlines. This indicates that the organization is utilizing its assets in a better manner Delta Airlines. In spite of this high level of utilization of assets, AMR has recorded a lower return on equity at -8.87% as compared to 66.11 recorded by Delta Airlines. This indicates that Delta Airlines is more attractive to investors currently due to its higher return for every dollar invested in the organization by investors.
Solvency Analyses
The main explanation for AMR’s poor profitability in spite of its high level of efficiency and liquidity is its high level of financing obligations. AMR recorded interest expense of $ 823m as compared to its earnings before interest and taxes of $ 308m (United States Security Exchanges Commission, 2010). This led to a great decline in the organization’s interest coverage ratio to 0.374 as compared to 2.21 recorded by Delta Airlines. This indicates that AMR is highly exposed to the risk of financial distress due to its low ability to meet interest expenses from its earnings before interest and taxes. American Airline has further recorded a lower debt to equity ratio of 3.73 as compared to debt to equity ratio of 47.14 recorded by Delta Airlines. This indicates the lower level of exposure of AMR to the risk of insolvency as compared to Delta Airlines. Nevertheless, Delta airlines is able to pay its interests better from operating cash flows implying that in spite of its high debt to equity ratio it is operating at safer solvency margins than American Airways.
Cash Flow Analyses
    From the above study, it is clear that American Airlines has recorded higher efficiency and liquidity levels but lower profitability than Delta Airlines. AMR more over recorded a lower level of cash flows at $-721 million as compared to free cash flows of $ 1490 million  recorded by Delta Airlines. A low cash flow indicates AMR’s low ability to finance its operations with incremental cash flows. Digging deeper to the reason as to why AMR recorded this low level of cash flows, it is clear that the organization incurred higher capital expenditures as compared to Delta Airlines. AMR incurred capital expenditures worth $ 1962 million in 2010. This led to significant decline in its cash flows as well as increase in debt financing and interest expense. This has further resulted to Delta Airways realizing a higher cash flow yield at 0.464 as compared to American Airlines which recorded a cash flow level of -0.109 in 2010. This indicates the organization’s reduced level of attractiveness in generating cash flows to investors.
    Conventionally, a high level of efficiency and effectiveness in financial management is expected to result to a higher stability and profitability levels to an accounting entity. This conceptual back ground does not resonate well with the poor profitability levels recorded by AMR in spite of its higher liquidity and efficiency. It is thus worth noting the effect of the organization’s heavy capital investments. To improve its service delivery, AMR incurred extremely higher level of debt financed capital expenditures as compared to Delta Airlines
, resulting to a high level of interest expense. This cash out lay is expected to increase the level of cash flows recorded by the organization in the future and it cannot be ignored in this analyses. If financial information used in this study is adjusted to this one time item difference in capital expenditure between the two organizations, AMR is more profitable than Delta Airlines by big margins.
Assumptions
    The above analyses are based on various assumptions. For instance, while it may not always be easy to determine the cost of service in a service industry, associated direct costs to service delivery has been used as the cost of sales in equations. Being a service industry, the level of inventory was also minimal. The findings of this study are further subject to the assumptions of ratio analyses. For instance, relationships are assumed to exist between variables used in various ratios. Ratios development is also assumed to be based on a sound conceptual frame work.
Stock Price Movement
In terms of returns to share holders, Delta Airlines recorded a higher price earnings ratio of 18 as compared to the price earning ratio reported by AMR in 2010. This is explained by the low level of AMR stock prices at an average of $7.79 on December 2010, as compared to Delta’s stock price of $12.6 recorded on December 2010. The stock price movement for the past one and five years is as indicated below.

 
 
American Airlines (AMR) 1 year stock movement
 
5 years
 
    Source: Yahoo finance 2011
From the organization’s stock prices presented above, it is clear that both Delta Airlines and American Airlines have recorded declining stock prices over the period of the recent global financial crises. The two organization’s stock is behaving in a similar manner in that they after declining significantly towards 2010, they assumed an upward trend between 2010 and 2011 before resuming their bearish trend from January 2011 to date. Nevertheless, it is clear that Delta Stock is highly volatile as compared to the stock of American Airways from the above presentations. High volatility (standard deviation) indicates a high beta of risk associated with the organization’s stock. Highly volatile stock is not good for investment. Decline in the organization’s performance between 2008 and 2009 is traced fro m the effects of the recent global financial crises that occurred in US in 2007/2008 and spread to other parts of the world. Between 2008 and 2009, there was reduced demand for air transport as the economy weakened reducing disposable income in house holds. People opted for cheaper means of transport, leading to decline in revenue generated by the air transport industry. For instance, between 2007 and 2005, domestic passenger revenue declined by 20% in AMR while international passenger revenue declined by 23% for the same organization. High air craft oil costs accelerated the rate the rate of decline of the air transport industry during the crises period. AMR reported an increase in aircraft fuels from $ 12,342m in 2009 as compared to $ 7384m recorded in 2008. Delta airways equally recorded a decline in the level of passengers over the same period.
Conclusion
    From the above study, it is clear that American Airlines operates at a higher rate of efficiency than Delta Airlines. The organization also has a more health liquidity levels. Nevertheless, its profitability and solvency level is poor as compared to Delta Airlines. This indicates that the ability of the Delta Airline to reward investors is high as opposed to American Air lines. Nevertheless, it is worth noting that reduction in profitability of American Airways was as a result of one time transaction where the organization acquired high level of debt to finance a huge capital investment leading to rise in interest expense. Without this extra ordinary item, AMR is more profitable than Delta Airlines. In conclusion, it is clear due to American Airlines low level of stock volatility and high level of liquidity and efficiency, it is the best choice to invest in the long run as opposed to Delta airlines which is highly inefficient in operations.

References
United States Security Exchanges Commission (2010). AMR Corporation 2010 annual report.
Retrieved December 8, 2011 from http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDIyOTIzfENoaWxkSUQ9NDM3MDEwfFR5cGU9MQ==&t=1
United States Security Exchanges Commission (2011). Delta Airlines form 10k. Retrieved
December 8, 2011
from http://images.delta.com.edgesuite.net/delta/pdfs/annual_reports/2010_10K.pdf
Yahoo finance (2011). Basic chart. Retrieved December 8, 2011 from
http://finance.yahoo.com/q/bc?s=AMR&t=5y&l=on&z=l&q=l&c=